® ℠ Morningstar Document Research FORM 10-Q TAKE TWO INTERACTIVE SOFTWARE INC - TTWO Filed: September 10, 2007 (period: July 31, 2007) Quarterly report which provides a continuing view of a company's financial position UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ⌧ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF l934. For the quarterly period ended July 31, 2007 OR � TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-29230 TAKE-TWO INTERACTIVE SOFTWARE, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 51-0350842 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 622 Broadway New York, New York 10012 (Address of principal executive (Zip Code) offices) Registrant’s Telephone Number, Including Area Code: (646) 536-2842 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No � Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). Large Accelerated Filer ⌧ Accelerated Filer � Non-Accelerated Filer � Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes � No ⌧ As of September 6, 2007, there were 74,039,503 shares of the Registrant’s Common Stock outstanding. Source: TAKE TWO INTERACTIVE SOFTWARE INC, 10-Q, September 10, 2007 Powered by Morningstar® Document Research℠ INDEX PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Unaudited Condensed Consolidated Financial Statements 6 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 32 Item 4. Controls and Procedures 32 PART II. OTHER INFORMATION 33 Item 1. Legal Proceedings 33 Item 1A. Risk Factors 33 Item 6. Exhibits 35 Signatures 36 (All other items in this report are inapplicable) 2 Source: TAKE TWO INTERACTIVE SOFTWARE INC, 10-Q, September 10, 2007 Powered by Morningstar® Document Research℠ PART I. FINANCIAL INFORMATION Item 1. Financial Statements TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) July 31, October 31, 2007 2006 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 61,625 $ 132,480 Accounts receivable, net of allowances of $66,371 and $91,509 at July 31, 2007 and October 31, 2006, respectively 100,427 143,199 Inventory, net 75,790 95,520 Software development costs and licenses 126,750 85,207 Prepaid taxes and taxes receivable 39,146 60,407 Prepaid expenses and other 32,223 28,060 Total current assets 435,961 544,873 Fixed assets, net 46,223 47,496 Software development costs and licenses, net of current portion 33,088 31,354 Goodwill 193,091 187,681 Other intangibles, net 33,409 43,248 Other assets 16,541 14,154 Total assets $ 758,313 $ 868,806 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 93,305 $ 123,947 Accrued expenses and other current liabilities 134,567 128,282 Deferred revenue 12,605 11,317 Total current liabilities 240,477 263,546 Deferred revenue 50,000 50,000 Line of credit 11,000 — Other long-term liabilities 4,310 4,868 Total liabilities 305,787 318,414 Commitments and contingencies Stockholders’ Equity: Common Stock, $.01 par value, 100,000 shares authorized; 73,987 and 72,745 shares issued and outstanding at July 31, 2007 and October 31, 2006, respectively 740 727 Additional paid-in capital 505,293 482,104 Retained earnings (accumulated deficit) (70,684) 60,659 Accumulated other comprehensive income 17,177 6,902 Total stockholders’ equity 452,526 550,392 Total liabilities and stockholders’ equity $ 758,313 $ 868,806 See accompanying Notes. 3 Source: TAKE TWO INTERACTIVE SOFTWARE INC, 10-Q, September 10, 2007 Powered by Morningstar® Document Research℠ TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts) Three months ended July 31, Nine months ended July 31, 2007 2006 2007 2006 Net revenue $ 206,415 $ 241,181 $ 689,191 $ 771,284 Cost of goods sold 168,279 184,055 532,086 640,719 Gross profit 38,136 57,126 157,105 130,565 Selling and marketing 35,223 27,585 98,406 101,423 General and administrative 34,703 44,260 113,788 116,276 Research and development 11,210 17,406 37,296 51,212 Business reorganization and related 7,100 — 16,062 — Impairment of long-lived assets — 8,529 — 14,778 Depreciation and amortization 7,006 6,290 20,743 19,778 Total operating expenses 95,242 104,070 286,295 303,467 Loss from operations (57,106) (46,944) (129,190) (172,902) Interest income and other, net 748 1,199 2,632 1,456 Loss before income taxes (56,358) (45,745) (126,558) (171,446) Provision (benefit) for income taxes 2,188 45,634 4,785 (572) Net loss $ (58,546) $ (91,379) $ (131,343) $ (170,874) Basic and diluted loss per share $ (0.81) $ (1.29) $ (1.83) $ (2.41) Basic and diluted weighted average shares outstanding 72,075 71,095 71,714 70,954 See accompanying Notes. 4 Source: TAKE TWO INTERACTIVE SOFTWARE INC, 10-Q, September 10, 2007 Powered by Morningstar® Document Research℠ TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine months ended July 31, 2007 2006 Operating activities: Net loss $ (131,343) $ (170,874) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Amortization and write-off of software development costs, licenses and intellectual property 88,806 129,317 Depreciation and amortization of long-lived assets 20,743 19,778 Impairment of long-lived assets — 14,778 Stock-based compensation 10,346 14,419 Provision (benefit) for deferred income taxes (159) 19,540 Provision for price concessions, sales allowances and doubtful accounts 79,145 127,017 Foreign currency transaction gain and other (805) (1,031) Changes in assets and liabilities, net of effect from purchases of businesses: Accounts receivable (30,872) (25,351) Inventory 19,730 53,006 Software development costs and licenses (117,447) (108,717) Prepaid expenses, other current and other non-current assets 16,652 (35,955) Accounts payable, accrued expenses, deferred revenue and other liabilities (27,551) 48,435 Total adjustments 58,588 255,236 Net cash (used for) provided by operating activities (72,755) 84,362 Investing activities: Purchase of fixed assets (16,629) (18,600) Payments for purchases of businesses, net of cash acquired (982) (191) Net cash used for investing activities (17,611) (18,791) Financing activities: Proceeds from exercise of options 5,501 2,787 Borrowings on line of credit 11,000 — Payment of debt issuance costs (1,764) — Excess tax benefit on exercise of stock options — 163 Net cash provided by financing activities 14,737 2,950 Effects of exchange rates on cash and cash equivalents 4,774 3,414 Net (decrease) increase in cash and cash equivalents (70,855) 71,935 Cash and cash equivalents, beginning of year 132,480 107,195 Cash and cash equivalents, end of period $ 61,625 $ 179,130 See accompanying Notes. 5 Source: TAKE TWO INTERACTIVE SOFTWARE INC, 10-Q, September 10, 2007 Powered by Morningstar® Document Research℠ TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements (Dollars in thousands, except share and per share amounts) 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Take-Two Interactive Software, Inc. (“the Company”, “we”, “us”, or similar pronouns) is a leading global publisher, developer and distributor of interactive entertainment software, hardware and accessories. Our publishing segment, which consists of Rockstar Games, 2K Games, 2K Sports and 2K Play, develops, markets and publishes software titles for the following leading gaming and entertainment hardware platforms: Sony Microsoft Nintendo PLAYSTATION®3 Xbox 360™ Wii™ PlayStation®2 Xbox® DS™ PSP® (PlayStation®Portable) Game Boy® Advance We also develop and publish software titles for the PC. Our distribution segment, which primarily includes our Jack of All Games subsidiary, distributes our products as well as third-party software, hardware and accessories to retail outlets primarily in North America. Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of the Company and reflect all normal and recurring adjustments necessary for fair presentation of our financial position, results of operations and cash flows. Inter-company accounts and transactions have been eliminated. The preparation of these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in these